The Salt Lake City office of commercial real estate firm CBRE has released its second quarter 2017 MarketView report, highlighting conditions of the local office, retail and industrial markets.
An increase in office property supply shows it is still a primarily demand-driven key in Salt Lake and reflects a market at equilibrium during the second quarter, the report says. New office completions are currently on track to surpass last year’s record-high levels, but with pre-lease percentages holding at 65 percent, fear of an over-built market can be pacified for the time being. Three buildings were completed during the second quarter and 980,000 square feet of office space remains under construction, all of which is located in suburban markets.
Though new construction led to a rise in vacancy levels, increased availability is being welcomed by tenants who have previously had limited options in the area. More construction is on the horizon, but most projects are not expected to break ground without a commitment from a major tenant. One such project that was announced this past quarter was the redevelopment of the former Shopko in Sugar House, which is planned to be a three-building project consisting of two office buildings and one multifamily building.
{mprestriction ids="1,3"}Barb Johnson, first vice president at CBRE said, “The University of Utah finalized a 170,000-square-foot medical office lease at the Sugar House development that will house a consolidated specialty clinic. The university’s specific requirements and commitment really made this project possible, following the pattern we’ve seen with many other developments. The majority of recent supply increases have been demand-driven.”
Retail
As was the case during the first quarter, another wave of big-box, nationwide-chain closures occurred in the local market during the second quarter, driving up vacancy rates and opening the door for more transformation within Salt Lake City. In the past six months, three Kmarts — each over 100,000 square feet — have closed, as well as two Macy’s and the Sugar House Shopko, among others. Though anticipated, these closures have had a profound effect on Salt Lake’s retail landscape. Since mid-year 2016, vacancy has climbed 2.1 percentage points to end the second quarter at 6.8 percent.
These changes within the industry have brought about a great deal of transformation as landlords look for ways to be strategic and creative in the current environment. Many are seeking to re-invent retail centers with a more diversified and relevant tenant mix. During the past six months, vacancies have been filled by luxury theaters, mid-box discount and home-improvement retailers, and re-purposed into office or self-storage space. There are also existing plans for other vacant retail spaces to be converted to office and other concepts, along with new, ground-up developments.
“There has been a slow-down in retail construction, but with two major shopping centers set to break ground before year-end, this is set to change,” said JR Moore, first vice president at CBRE. “While some projects have taken pause, developers are willing to move forward given the right location and concept. With solid demographic growth, the future of Salt Lake’s retail market remains bright.”
Industrial
Industrial demand during the second quarter remained broad-based and strong, resulting in 2.6 million square feet of new leases — the third consecutive quarter to surpass 1 million square feet. The last time this occurred was during 2012-2013. Large logistics and distribution-related users, as well as supply chain and national e-commerce tenants, fueled this elevated activity. In total, 11 new leases over 75,000-square-feet were recorded by mid-year 2017, nearly doubling the total of large leases signed at this point during each of the past two years.
“Heavy construction continues to be a major headline for Salt Lake’s industrial market. Currently there is 3.9 million square feet under construction, with a significant amount of additional construction expected before year-end,” said Tom Dischmann, senior vice president. “This is especially significant considering that industrial vacancy continues to decrease.”
Such high leasing and construction levels have led to a four-year run of positive net absorption, bringing the year-to-date total to 1.2 million square feet. As has traditionally been the case, the majority of the absorption took place in the Northwest Quadrant — covering the airport, West Valley and California Avenue submarkets — which totaled 93 percent for the second quarter.{/mprestriction}
